Suppose 40% of Home trade is with country 1, 30% is with country 2 and rest...
Suppose 40% of Home trade is with country 1, 30% is with country 2 and rest is with country 2. Home's currency apperciates 10% against country 1, 16% against country 2 but depreciates 25% against country 3. Does home's effective exchange rate apperciated or depreciate? By how much?
Homework Answers
Home's effective exchange rate apperciated. The calculation are as follows,
Let the total value of home currency be 100 and the changes are as follows,
= (% of home trade in country 1 * % of change in country 1) + (% of home trade in country 2 * % of change in country 2) - (% of home trade in country 3 * % of change in country 3)
=40 (10%) + 30 (16%) - 30 (25%)
= 4 + 4.8 - 7.5
=1.3.
Home currency apperciated by 13%.
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